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Hanging Man Candlestick Pattern: Investors use technical analysis to predict stock price movements based on historical trends. The candlestick pattern is a popular method that examines the shape and color of individual candlesticks to identify past reactions and predict future stock price movements. This approach is essential for making informed investment decisions in the stock market.
In this article, we will understand one such candlestick pattern called the hanging man candlestick pattern.
Hanging Man Candlestick Pattern – Definition
The hanging man is one of the most frequently appearing single candlestick patterns. The formation of this pattern gives an indication of a bearish reversal. The hanging man candlestick pattern comprises a small body, a long lower wick, and little to no upper wick.
Here, the color of the candle can be either green or red as the color doesn’t impact the indication of the trend reversal. Furthermore, the length of the lower wick should at least be more than two times the length of the real body.
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As hanging is a bearish reversal pattern, traders can sell the security if they have bought it. Traders can also look for shorting opportunities if this pattern appears on top of an uptrend.
Hanging Man Candlestick Pattern – Meaning
As it is a bearish reversal indication pattern, the prior trend before the formation of this pattern needs to be an uptrend.
The candle has a small body due to the price closing near its open price. If the price closes above the open price then it will form a green candle and if it closes below it will form a red candle.
The color of the candlestick doesn’t have an impact on its indication because the bearish reversal indication is derived from the long bottom wick with a small body and little to no upper wick.
Hanging Man Candlestick Pattern – Psychology
When the price of the security is in an uptrend, there is more buying pressure in the market. During the formation of the hanging man candlestick, the price of the security drops down after its opening due to high selling. But the buyers manage to take the price near the open price and the candle closes near the open price.
The formation of the long wick is an indication of more sellers entering the market. Therefore the price of the security usually sees a downward momentum after the formation of the hanging man candlestick pattern as more sellers can potentially enter the market.
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Hanging Man Candlestick Pattern – Strengths
There are few situations where the formation of the hanging man candlestick pattern gives a stronger bearish reversal indication.
- Appearance near the support zone: If it is formed near a resistance level, it gives a strong indication that the price of security will potentially go down. This might occur due to multiple sell orders existing in that zone and the formation of this pattern might further bring in more sellers in the security.
- Formation near the all-time high: The formation of this pattern when the price is at an all-time high also strongly indicates that the price might potentially go down for a short duration or completely go into a downtrend. This is because the market participants are generally anxious when the price is at an all-time high and they would think of exiting the trade by booking the profits already made.
- Hanging man with the combination of RSI: When the hanging man pattern appears during an uptrend and the RSI indicator suggests that the security is in an overbought zone (above 70), the chances of reversal increase further.
Hanging Man Candlestick Pattern – Trading Ideas
Traders must ensure that the prior trend before the formation of this pattern is an uptrend. Once this pattern is formed in an uptrend, the following are the guidelines to take a trade:
- ENTRY: When the price of the security goes below the low price of the hanging man candlestick pattern then traders can take a sell entry.
- TARGET: Traders can exit the trade when the price of the security reaches near the immediate support zone. Once this level is reached, they can also book partial profits in the trade and hold on to the remaining position until the next support level.
- STOP LOSS: Traders can place the stop loss near the high price of the hanging man candlestick pattern.
Combining Hanging Man Candlestick Pattern with RSI Indicator
Market participants can combine candlestick patterns with indicators to get an even stronger indication of future price movement. Combining the hanging man candlestick pattern with RSI gives an even stronger indication of bearish momentum.
When this pattern is formed in the market and the RSI is also in an overbought zone, this is a stronger indication of potential downward movement in security. Market participants can therefore combine these two to get a stronger indication.
Difference Between Hammer and Hanging Man Candlestick Pattern
Both the hanging man candlestick and the hammer candlestick have a similar appearance. They both have long lower wicks and small real bodies. The difference between the two is that when this type of candlestick appears in an uptrend, it is called the hanging man candlestick pattern, while when it forms in a downtrend, it is known as the hammer candlestick pattern.
Hanging Man Candlestick Pattern – Example
In the above 15-minute chart of RELIANCE INDS, we can observe the formation of a hanging man candlestick pattern at the top of an uptrend. As explained in this article, the price of security went on a downtrend after the formation of the hanging man pattern.
Traders could have taken a sell entry at Rs. 2985.05 and the stop loss was at Rs. 2998.35
Hanging Man Candlestick Pattern – Key Takeaways
- To get an indication with a higher probability of succeeding, the prior trend must be an uptrend.
- The candlestick that forms this pattern consists of a long bottom wick, a small real body, and little to no upper wick.
- The color of the candle is not important and can be either green or red.
- This pattern indicates a bearish reversal.
Read more related articles: Rising Window Candlestick Pattern, Dark Cloud Cover Candlestick Pattern
Conclusion
In the article, we delved into one of the most commonly occurring candlestick patterns in the financial market, known as the “hanging man” candlestick pattern. We thoroughly examined the conditions that must be met for a candlestick to be classified as a hanging man candlestick pattern.
Additionally, we explored how traders can analyze this pattern and make informed trading decisions based on it. By understanding the nuances of this candlestick pattern, market participants can gain valuable insights into the market’s behavior and make more informed decisions when trading.
What are your views about this candlestick pattern? please let us know in the comment section below.
Written by Praneeth Kadagi
By utilizing the stock screener, stock heatmap, portfolio backtesting, and stock compare tool on the Trade Brains portal, investors gain access to comprehensive tools that enable them to identify the best stocks, also get updated with stock market news, and make well-informed investments.
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